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JAPAN ’ S EXPERIENCES OF OECD PEER REVIEW

JAPAN ’ S EXPERIENCES OF OECD PEER REVIEW. Ryokichi HIRONO Professor Emeritus, Seikei University 23 January, 2007 At Hotel Nikko, Jakarta. OUTLINE. 1. Introduction 2. History of OECD Peer Review in Japan 3. Peer Review Mechanism

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JAPAN ’ S EXPERIENCES OF OECD PEER REVIEW

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  1. JAPAN’S EXPERIENCES OF OECD PEER REVIEW Ryokichi HIRONO Professor Emeritus, Seikei University 23 January, 2007 At Hotel Nikko, Jakarta

  2. OUTLINE 1. Introduction 2. History of OECD Peer Review in Japan 3. Peer Review Mechanism 4. Major Findings and Some Salient Impacts of OECD Peer Reviews 5. Merits of OECD Peer Review 6. Need for Improvement in OECD PR Process 7. Some Lessons for Non-Member Countries from OECD Peer Review Mechanism

  3. 1. Introduction a. Establishment of OEEC in 1948 under the Marshall Plan b. Japan’s participation in OEEC’s Development Assistance Group in 1960 c. Re-organisation of OEEC into OECD in 1961 d. Japan’s full membership in OECD on 28 April, 1964, acceding to the Principle of Current and Capital Account Liberalisation e. Japan’s positive participation in the OECD’s Ministerial Meetings and All standing committees and their subsidiaries, maintaining the second largest financial contribution and taking some initiatives in setting guidelines on investment and ODA in developing countries

  4. 2. History of OECD Peer Review in Japan a. Among many OECD peer reviews, Economic Survey (33), conducted every 18 months, and ODA Review (4), conducted every 3-4 years, have been most long-standing considered most important, and most publicized and well-known in Japan, as growing pressures of economic globalisation have heightened the importance among OECD members for domestic macro-economic and structural policy and external policy coordination, as well as for learning from other countries’ experiences and steering public opinion in favour of some painful domestic reforms essential to long-term economic growth and wellbeing of the people in their respective countries and the world over. b. OECD’s Regulatory Reform has also become increasingly important in Japan (2) and other OECD countries, as their economic growth began to depend highly on deregulation and competition policies at home. Japan, together with Mexico, was the first member country in 2004 to agree to expose themselves to OECD monitoring process. c. With a rapid process of industrialisation in the 1960s and 70s, there was a growing concern in Japan and elsewhere in OECD member countries, particularly among civil society groups, with environmental protection, culminating in an increasing need for Environmental Performance Review (2) and an OECD consensus on PPP. d. Going for Growth has now become a regular policy reform monitoring report covering all OECD member countries including Japan (2).

  5. 3.1 OECD Peer Review (PR) Mechanism in Japan a. As in other countries, OECD PR mechanism in Japan starts with preparatory, consultation and assessment phases, followed by the publication of PR reports by OECD. Monitoring of progress made is included in all PRs. b. With the groundwork and major issues for PR prepared by the OECD mission with secretariat assistance and the memorandum on the issues prepared by Japan, a questionnaire is developed, often in consultation with Japanese delegation to OECD and a few other experts on and in Japan, for agenda setting for mission consultation which ordinarily lasts one week in Japan. c. PR mission carries out an intensive dialogue with the government of Japan (GOJ), academics and representatives of industry and civil society groups including trade unions, farmers and consumer groups, if found necessary. The mission, with secretariat assistance, makes detailed performance analysis and prepares a final draft report, including conclusions and recommendations.

  6. 3.2 OECD Peer Review (PR) Mechanism in Japan d. All OECD PR reports of Japan have been assessed by appropriate committees at their respective plenary meetings made up of all 30 member countries. For example, OECD’s Economic Development and Review Committee on a draft report of Economic Survey of Japan, OECD’s Special Group on Regulatory Reform for Regulatory Reform of Japan, Development Assistance Committee for Japan’s Official Development Assistance, Working Party on Environmental Performance for Environmental Performance Review of Japan, and Economic Policy Committee for Economic Policy Reform.

  7. 4.1 Major Findings of OECD PRs: Some Examples 1) Economic Survey of Japan 2006 a. Successfully implementing a new monetary policy framework: enhance the transparency of monetary policy, avoid an early and significant rise in long-term interest rates, scale back the role of public financial institutions and accelerate the privatisation of Japan Post. b. Achieving fiscal consolidation: reduce the still-large fiscal deficits through continued spending restraint and reducing public investment, some increase in consumption tax rate, and achieve a primary budget surplus by the early 2010s. c. Reducing income inequality and relative poverty: reduce increased dualism in the labour market through reducing the protection of regualar workers and increased social spending for vulnerable groups such as single parents. d. Upgrading the national innovation system to promote productivity growth through improving R&D system and education system, enhancing linkage between public and private research institutions and strengthening competition particularly in the network industries. e. Strengthening the integration of Japan in the world economy through enhancing import penetration, the stock of FDI and the inflow of foreign workers as well as through reducing barriers in agriculture.

  8. 4.2 Major Findings of OECD PRs: Some Examples 2) Going for Growth 2006 a. Furthering service liberalisation through strengthening of law enforcement and imposing heavier sanction, extending nationwide those regulatory reform measures applicable to special zones and promotion of competition in network industries, e.g. raising surcharge rate from 6 to 10% of the sales of the goods concerned and enlarging the free choice of electricity providers from 1/3 to 2/3 of consumers. b. Reducing producer support to agriculture by shifting market price support to direct payments and allowing entry of joint stock companies, e.g. government decision to allow on leased farmland. c. Easing employment protection of regular workers, e.g. white collar exemption law withdrawn and revision of labour laws in favour of equal treatment of non-regular workers endorsed by government. d. Reforming the financial sector by scaling public financial institutions, requiring banks to resolve non-performing loan problem and strengthening their capital base to overcome their remaining weaknesses, e.g., government targets of halving NPAs exceeded. e. Removing impediments to FDI by following government’s own plan to double FDI stock over 5 years, e.g., revising the Commercial Code to facilitate mergers and acquisitions by foreign companies using their Japanese subsidiaries.

  9. 4.3 Some Salient Impacts of OECD PRs in Japan 1) Environmental Performance Review a. Introduction of Polluter Pay Principle (PPP) in Japanese environmental legislations and national and local Agenda 21 and their effective implementation since 1991 b. Japan’s initiative in 1997 for the Kyoto Protocol under the United Nations Framework Convention for Climate Change (UNFCCC), encouraged by EnvPR. 2) Regulatory Reform Review, 1999 a. Installation of the Comprehensive Regulatory Reform Commission in 2002 b. Adoption of the National Plan for Doubling FDI Inflows, 2003 c. Enactment of a Law on the Privatisation of Japan Post in 2006 d. Empowerment of the Fair Trade Commission in 2006 3) Official Development Assistance Review, 2003 a. Mainstreaming MDGs in 2003 b. Institutional reforms for ODA implementation, 2006 c. Improving ODA effectiveness through harmonisation, alignment and partnership in 2006

  10. 4.4 Some Salient Impacts of OECD PRs in Japan 4) Economic Survey of Japan, 2005 a. Ending the Bank of Japan’s exceedingly cautious zero interest rate policy in 2006 b. Accelerating fiscal reforms and raising consumption tax rate, debate on-going c. Equal treatment of non-regular workforce in 2007 5) Some Recommendations found difficult and more time needed for policy reform and effective implementation a. Reduction of farm support programmes and increase of farm imports as share of domestic consumption through tariff reduction (tariffisation of quantitative import restrictions has already been done in accordance with GATT accord) b. Substantial increase of penalty rates charged to violation of the Fair Trade Law c. Streamlining the regulatory mechanism independent of the promotion function for telecommunication and information technology market d. Broadening the use of the specific road-related taxes for non-road expenditures 5

  11. 5. Merits of OECD Peer Review (PR) in Japan a. Made GOJ feel more at ease and less costly in adapting those policy and implementation reforms from the tried and tested experiences of other OECD countries. b. Assisted GOJ to win support at home for difficult policy decisions and measures by showing what other countries were doing, as PR policy and institutional recommendations came from a credible, like-minded international organisation, and finally as PR mechanism has been followed in other international organisations such as EU, IMF and WTO. c. Enhanced Japan’s policy ownership, as PR policy recommendations have never been legally binding. d. Publication of PR results has exerted pressures on GOJ through parliamentary debates, mass media and civil society groups to seriously consider those issues identified and put their recommendations into practices. e. Monitoring of PR recommendations enhanced chances of faster and more effective implementation. f. OECD PR mechanism, by allowing GOJ to join PRs of other member countries, has enhanced opportunities for them to learn from the policy successes and failures elsewhere and thus to coordinate their domestic policies with the rest of OECD for their own benefits.

  12. 6. Need for Improving OECD Peer Review Process a. Monitoring should be more frequent for all PR mechanism, as is done through annual Economic Policy Reform Paper by EPC. b. Given financial constraints on OECD, the preparatory phase could enhance credibility by working in close consultation with the World Bank, WTO and other international organisations as well as with research institutions in reviewed countries better equipped with policy research capability. The entire phase could be even commissioned to such research organisations. c. While the consultation phase is vital to making both policy analysis and recommendations satisfactory to the review mission and valuable to reviewed countries, the phase would involve intensive dialogue with so many stakeholders both within and outside the reviewed governments. To reduce time burden on both parties, questionnaires could be both more concise and focused, by introducing some common standards and indicators amenable to quantitative measurements, e.g. tax revenues, national and external debts and annual debt servicing as % of GDP. d. In countries as in Japan where English is not a mother tongue, the use of English language during the OECD PR process would increase not only the financial burden and time waste on the government of reviewed countries, but also there may be some interpretative prejudices introduced. The enormity of the cost and time-consuming trouble should be easily understood by all OECD countries if they had to use Japanese or Chinese language as a working language. To avoid this, the use of preferred language be required except for the assessment phase, which requires OECD to be a multi-lingual institution.

  13. 7. Some Lessons for Non-Member Countries (NMCs) from OECD PR Mechanism a. Better understanding of the OECD PR process required for effective installation of OECD PR: why, what, how and cost-benefits to NMCs. b. Support to capacity building of reviewed country by OECD through bilateral and multilateral ODA is essential in many areas of cooperation to make OECD PR meaningful and welcome, e.g., comprehensive economic and social data collection, analysis and publication, and macro-economic, structural, social and environmental policy formulation, implementation, monitoring and evaluation. c. Need for NMCs to accelerate legislative and enforcement reforms such as free parliamentary debates and institutional arrangements such as a broader participation of multi-stakeholders in all OECD PR process, particularly in preparatory and consultation and monitoring phases. d. Need for NMC ownership throughout OECD PR process so that various stakeholders in reviewed countries would find the process as enhancing their own benefits in terms of macro-economic stability, long-term economic growth, social equity and environmental protection.

  14. THANK YOU FOR YOUR KIND ATTENTION For further questions, please contact the following email address: ryokichi@iea.att.ne.jp

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